Converting to a Limited Liability Partnership
Following the introduction of the Limited Liability Partnerships Act 2000, it is now possible to form a new legal entity known as a Limited Liability Partnership ("LLP").
Whilst initially the take-up for this new legal entity was slow, it has gathered pace over the last few years and is now becoming a rather more common form of vehicle for new businesses. There are also many businesses which have been operating as traditional partnerships and have elected to convert to LLPs for the various benefits which that brings.
The main benefit which an LLP has for its members is that their liability is limited, in the same way as the liability for the shareholders in a limited company is limited. In other words, the members do not have the unlimited personal liability for the debts of the business which partners in a traditional unincorporated partnership bear.
Furthermore the LLP, being a separate legal entity, is able to enter into contracts in its own name, rather than in the name of the partners on behalf of the partnership.
There are several benefits of this. As an example, if a partnership occupies leasehold property then the lease on that property is likely to be held in the name of up to four of the partners. When one of those partners retires or leaves the partnership, then there should be an assignment of the lease from those partners to a new set of partners excluding the partner who has retired or left. This process can be time consuming and may be expensive, and is often overlooked. With an LLP, however, the property is actually held in the name of the LLP itself and therefore changes in the membership make no difference to the name on the lease of the property.
Additionally, for taxation purposes, the members of an LLP are treated in the same way as the partners in a partnership. In other words, the members of an LLP are taxed as self-employed, in the same way as partners of a partnership. However, the LLP is not subject to corporation tax.
The process of conversion to LLP status is relatively simple. There should be a formal agreement transferring the business of the partnership to the new LLP, and then the old partnership should eventually be dissolved once that has been completed.
Care needs to be taken to ensure that the clients and customers of the LLP are made aware of the transfer of the business, and know that they are dealing with the new LLP rather than the old partnership.
There may be some contracts which cannot be transferred to the LLP without the consent of the other party to the contract. An example of this would be a lease held by the partners, where the consent of the landlord will almost certainly be required to transfer the lease into the name of the LLP. In addition, the partners will need to ensure that their bank is kept informed about the intention to convert, that the bank is prepared to extend facilities to the new LLP, and that those facilities will be in place by the time of the conversion.
The relationship between the members of an LLP (and the LLP) should be governed by a written members' agreement and, in the same way that partnership agreement is private, so is a members' agreement. In this respect, therefore, it differs from the articles of association of a limited company (which are a public document), and is more akin to a shareholders’ agreement (which is a private document). Whilst there is no obligation to put in place a written members' agreement, it makes very good sense to do so, just as it does to have a written partnership agreement in place.
Details of the ownership of the LLP are held at Companies House, and therefore are available to the general public. In addition, an LLP is required to file an annual return each year, and to file its accounts at Companies House. The accounts of a traditional unincorporated partnership are private, and not required to be made available to the public, and this significant difference may deter some businesses from converting.